Thursday, September 29, 2016

"Gen. Tom Thumb's father brought suit in Paris, against the manager of a theatre, who announced a play called Tom Pouce, (Thumb,) while the General was exhibiting himself at another place. The tribunal decided in favor of the General, the name of Tom Pouce had to be removed from the bills, and the manager paid the costs of suit. The piece was produced as 'Tom Pouff' afterwards."

Very broad preemption finding makes me blog this older case
that popped out of Westlaw. Duer makes
medicine dosage adherence tools suitable for affixing to pill bottles. The
product has seven slides, each representing a day of the week, and a user moves
a slide each day she takes a pill. Duer claimed
rights in the trademark “Take-n-Slide”; a utility patent; and copyright in the
insert sheet packaged with her product. Defendants allegedly copied Duer’s product and
package insert sheet, which she discovered when one of their customers
contacted her, believing that they’d received her product.

Duer properly alleged non-functionality by identifying several non-functional elements, including
the particular shape of the product, the vertical arrangement of the days of
the week, and the chosen color scheme. “The existence of a utility patent which
contains claims that may include the above elements does not change the
analysis.” The utility patent was strong but not conclusive evidence of
functionality; she was entitled to try to meet her “heavy” burden of showing
nonfunctionality. Duer also properly pled secondary meaning, with details about
her ad expenditures, how long she’d advertised, and at least one instance of
actual confusion as well as intentional copying.

However, the court dismissed Duer’s claims for false
advertising and unfair competition.
False advertising: the product insert allegedly actually displayed Duer’s
product. However, this wasn’t “commercial
advertising or promotion,” because it wasn’t disseminated to influence
consumers to buy defendants’ goods. “A
product insert cannot influence a consumer’s purchasing decision because the
public would only see a product insert after purchasing the product.”

Duer’s unfair competition/passing off claim failed because
she failed to allege that defendants weren’t the actual, physical origin of the
products it sold. This seems quite
wrong: her argument was that defendants sold products that were falsely
attributed to her; the fact that they
are the origin is kind of the point.

More plausibly, but still interestingly, the court held that
Duer’s Georgia Uniform Deceptive Trade Practice Act and her tortious
interference with contract claim were preempted by the patent/copyright laws
because they relied on the same conduct alleged in her patent, copyright, and
trade dress infringement claims. [Sloppiness
here: there’s no preemption based on the trade dress-related claims, on these
facts.] Duer was essentially arguing
reverse passing off—that defendants were claiming her design as their own—which
courts routinely find to be preempted.

Duer argued that her GUDTPA claim had an “extra element” of
a deceptive act, but reverse passing off implicitly contains a deceitful act or
misrepresentation. “The fact that the
defendants were selling the allegedly infringing works under their own
names—and, hence, implicitly misrepresenting the origin of the works or causing
confusion in the consuming public cannot alter the finding of preemption.”

The court denied VIP’s motion for summary judgment on its
declaratory judgment action against JDPI, and also kicked out a number of VIP’s
defenses, leaving confusion and dilution claims for trial based on VIP’s “Bad
Spaniels” durable rubber squeaky novelty dog toy, which is in the shape of a
liquor bottle and features a wide-eyed spaniel over the words “Bad Spaniels,
the Old No. 2, on your Tennessee Carpet.” On the back of the Silly Squeakers
packaging for the Bad Spaniels toy, it states: “This product is not affiliated
with Jack Daniel’s.”

VIP's product, on left

VIP's label

The court found that VIP couldn’t be engaged in nominative
fair use because this defense only applies where a defendant uses the plaintiff’s
identical mark or trade dress, which VIP didn’t. “[I]t is the defendant’s very use of the
plaintiff’s identical trademark that makes the nominative fair use analysis
necessary rather than application of AMF Inc. v. Sleekcraft Boats, 599 F.2d 341
(9th Cir. 1979) which utilizes eight factors to focus on the similarity of the
trademarks used by the plaintiff and the defendant in order to determine
liability for likelihood of confusion in the marketplace.” This is an extremely tone-deaf reading of New Kids, because it’s the reference to
the plaintiff, not the identicality of the marks, that drives the First
Amendment interests justifying a different liability test. The fact that a trademark owner can claim
confusion based on a parodic reference to it makes the need for New Kids at least as great when the
reference also involves distortion.

Then, and arguably worse, the court found that VIP couldn’t
raise a First Amendment defense because its dog toy wasn’t an artistic or expressive
work. Aaaaaaaaaaargh. OK: (1) Both parties claim that the markings,
shape and coloration of the dog toy communicate a message, though they disagree
about what that message is. That means
that the dog toy is expressive, even if it’s not a painting. (2) Expressive
is not the opposite of commercial speech, nor is it the opposite of “has
trademark significance”; the dog toy is not, in any event, commercial speech. (3)
The trademark owner’s claim seeks to suppress an allegedly infringing message,
not any nonexpressive characteristics of the dog toy: trademark regulates
communication, which doesn’t make it unconstitutional but does mean that
extending it beyond commercial speech is dicey business indeed.

Nonetheless, the court found that regular Sleekcraft applied. “[T]he First Amendment
affords no protection to VIP because it is trademark law that regulates misleading
commercial speech where another’s trademark is used for source identification in
a way likely to cause consumer confusion.”
Why is the design of the product commercial speech? Because “VIP makes trademark use of its
adaptations of JDPI’s trademarks and the Jack Daniel’s trade dress to sell a
commercial product, its novelty dog toy,” and thus it has “the dual purpose of
making an alleged expressive comment as well as the commercial selling of a
non-competing product.”

A reasonable trier of fact could find likely confusion and
dilution of a famous mark. VIP also failed to exclude the report and the
testimony of JDPI’s dilution expert, Dr. Itamar Simonson, who opined on “the
implication(s) of the association between the Bad Spaniels toy and Jack
Daniel’s whiskey on JDPI’s trade dress and trademarks and the meaning of the
mark/brand to consumers.”

JDPI proposed that Simonson would discuss: 1) The basics of
consumer behavior and “how marks such as famous trade dress are represented in
memory”; 2) the basics of the “associative network memory model” which are
accepted by experts in the consumer behavior field; 3) the application of the
“associative network memory model” to the instant case; and 4) the conclusion
that VIP’s Bad Spaniels toy causes negative implication for JDPI’s trade dress
and marks and thus is likely to tarnish them.
The court allowed his testimony as admissible based his knowledge,
training and experience rather than on his use of scientific evidence with a
testable, proven methodology. Surveys,
focus groups, studies, or other real world tests weren’t required for him to
apply his expertise to the facts of the case.

Heartland appealed from summary judgment granted to McHugh
in Heartland’s deceptive trade practices case against McHugh, and the court of
appeals reversed, finding that the relevant ad was false by necessary
implication and that injury was presumed because the ad targeted Heartland.

In 2014, McHugh published a full-page ad and online ad in
the Urbana Daily Citizen newspaper that discussed Heartland, a skilled nursing
care facility located in Urbana, Ohio. The ad contained a picture of
Heartland’s facility in Urbana, and stated:

ATTENTION!

The government has cited HEARTLAND OF URBANA NURSING AND
REHABILITATION CENTER for failing to provide necessary care and services to
maintain the highest well-being of each resident. If you suspect that a loved
one was NEGLECTED or ABUSED at Heartland of Urbana, call McHugh Fuller today! Has
your loved one suffered?

Bedsores

Broken Bones

Unexplained Injuries

Death

“Attention,” “Neglected or Abused,” and “Death,” were in
red, bold type. “Cited” was also underlined in red.

In fact, Heartland had not had a citation of any kind for
over two years, and had not had a citation remotely similar to the one alleged
in the advertisement since June 24, 2010, more than four years previously. Even
the June 2010 citation did not cause harm to any nursing home patient, and the
deficiencies had been corrected in June 2010. Under Federal standards, violations are assessed
by letters ranging from “A” to “L,” with “L” being the most severe. “J,” “K,”
or “L” violations mean that a nursing facility is in immediate jeopardy, and is
in risk of being cut-off from Medicare reimbursement. The particular violations
on June 24, 2010 were only “E” and Level 2 violations, “which, at worst,
contemplate only minimal physical discomfort and the potential to undermine a
given resident’s ability to maintain or reach his or her highest practicable
well-being, in light of definitions of that resident’s plan of care.”

According to Heartland, “negligence, abuse, bedsores, broken
bones, unexplained injuries, and death” would have Level 4 severity. By
contrast, three matters that were involved in the June 24, 2010 citation, were:
a failure to document and administer laxatives prescribed for constipation; a
failure to timely reassess abdominal pain for 18 hours; and a failure to apply
prescribed antibiotic for two weeks after a physician had ordered a culture.

Subsequently, the legislature amended state law to prohibit
the use of the results of an inspection or investigation of a home in an ad unless
the ad included:

(i) The date the inspection or
investigation was conducted;

(ii) A statement that the director
of health inspects all homes at least once every fifteen months;

(iii) If a finding or deficiency
cited in the statement of deficiencies has been substantially corrected, a
statement that the finding or deficiency has been substantially corrected and
the date that the finding or deficiency was substantially corrected;

(iv) The number of findings and
deficiencies cited in the statement of deficiencies on the basis of the
inspection or investigation;

(v) The average number of findings
and deficiencies cited in a statement of deficiencies on the basis of an
inspection or investigation conducted under this section during the same
calendar year as the inspection or investigation used in the advertisement;

(vi) A statement that the
advertisement is neither authorized nor endorsed by the department of health or
any other government agency.

Query: what are the First Amendment implications of this
rule?

The trial court found that this legal change had mooted
Heartland’s claim. The court of appeals
reversed, because if McHugh willfully violated the state Deceptive Trade
Practices Act, Heartland would be entitled to attorneys’ fees.

Ohio courts follow the Lanham Act in interpreting the DTPA. The court of appeals found the ad false by
necessary implication. “When the
advertisement was published, McHugh, a law firm, would have known that any
claims based on the June 24, 2010 citations were barred due to the statute of
limitations.” McHugh also had access to
information that Heartland wasn’t cited in 2012 or 2014, and that none of the
2010 citations related to harm to residents. “[T]he only reasonable conclusion
is that the advertisement falsely implied Heartland was a facility where
patients were being exposed to very dangerous conditions, including death,”
which justified a finding of intent to deceive consumers.

In noncomparative advertising, plaintiffs must show
causation and harm, but a material, misleading comparison to a specific product
necessarily causes harm to the target, relieving the target of its burden of
separately showing causation and harm.
The court of appeals applied this rule here, to the broader category of “misleading
advertisements identifying a specific party,” although the ad wasn’t
comparative. The court of appeals did say that the presumption of causation and
injury was rebuttable.

Vitamins Online sells dietary supplements online, including
on Amazon under the brand name NutriGold. Defendant (NatureWise) does the same, selling
competing garcinia cambogia and green coffee supplements. Vitamins Online sold
its versions before 2010, but then Dr. Oz made them famous and caused competitors
to enter the market. NatureWise had its
employees vote on the helpfulness of some of the reviews on its product pages,
promoting positive reviews and demoting negative reviews. NatureWise also
encouraged customers to post or repost their positive reviews on Amazon by
offering them free products or gifts cards; “NatureWise would review and, in
some cases, make minor edits to the reviews before asking the customers to post
them on Amazon.” The number of positive Amazon
reviews a product receives affects that product’s position in Amazon search
results.

NatureWise argued that it didn’t make any false or
misleading statements, which led the court to a scholarly and thorough discussion
of omissions under the Lanham Act.
Because the language of the Lanham Act bars “any word, term, name,
symbol, or device, or any combination thereof, or any false designation of
origin, false or misleading description of fact, or false or misleading
representation of fact” that constitute infringement or false advertising, false
advertising doesn’t “necessarily require a false or misleading description or
representation of fact.” In other words,
“the statute unambiguously allows for a false advertising claim to be based on
the ‘any word, term, name, symbol, or device’ language as long as the use of
that conduct ‘in commercial advertising or promotion’ results in the unlawful
effect of ‘misrepresent[ing] the nature, characteristics, qualities, or
geographic origin of his or her or another person’s goods, services, or
commercial activities.’”

The court thought that NatureWise’s Amazon-related conduct
could fall under the concept of a “device.”
Offering free products was a mechanism to increase positive reviews;
NatureWise also used a mechanism provided by Amazon “for the special purpose of
increasing the visibility of positive reviews and decreasing the visibility of
negative reviews.”

NatureWise also argued that its conduct wasn’t “commercial
advertising or promotion” because it wasn’t the source of the statements at
issue (an argument already rejected above) and because there was no evidence
that the statements at issue were viewed by a sufficient number of the relevant
purchasing public. The court rejected an
actual viewing standard, and held that “the test only requires a showing that
the information was sufficiently disseminated to the relevant purchasing
public.” The information at issue—the reviews and helpfulness votes—was available
on the NatureWise Amazon product pages.
NatureWise only sells the products at issue on Amazon, so that
information was disseminated to all
of NatureWise’s actual or potential customers, which was enough to satisfy the
test.

But was there a misrepresentation? Offering free products in exchange for
positive reviews wasn’t enough to show that that NatureWise’s conduct gave a
false or misleading representation of the nature, characteristics, or qualities
of NatureWise’s goods or commercial activities. Vitamins Online failed to show
that the reviews posted by the customers were not genuine. But what about disclosing that they were in
exchange for free products? The FTC
thinks this disclosure is material to consumers to judge the credibility of the
review and therefore required. I
agree—I do give less weight to positive reviews with the required disclosure,
though I don’t discount them entirely.
The court doesn’t discuss whether the reviews failed to disclose the
quid pro quo, just says that Vitamins Online didn’t show that the reviews were
false or misleading.

However, manipulating the prominence of the reviews block
voting on the helpfulness of the reviews could constitute a false or misleading
representation. (Note that the reason
for this is essentially the same reason that quid-pro-quo reviews ought to be
disclosed!) “The representation being
made by the placement of these reviews on the product page is that customers
wrote, posted, and rated the reviews and that the reviews that appear first in
the list are the ones that customers found to be most helpful.” Distorted ranking of helpfulness could clearly
deceive consumers about which reviews were most helpful.

NatureWise argued that, to be actionable, an omission has to
relate to an affirmative claim, and that therefore there can be no liability
when it didn’t make any affirmative
claims. But the court’s reasoning above
disposes of that argument (and NatureWise did make affirmative claims about
helpfulness/lack thereof of particular reviews to consumers). “Because Vitamins Online has demonstrated
that the reality, that some customers and a block of employees of the
manufacturer voted on the helpfulness of some of the review, may be different
than the implied representation, that a certain number of customers voted on
the helpfulness of some of the reviews, the court concludes that genuine issues
of material fact exist as to whether the statements are false by necessary
implication.”

Section 43(a) is not a “federal codification of the overall
law of unfair competition,” but the court concluded by noting that, even under its
broad interpretation, several “causes of action related to unfair competition”
would still not be covered by the Act, including “trade secret violations,” “[c]ontractual
disputes,” and “false claims of trademark rights.”

CrossFit generates revenue by credentialing and certifying
fitness trainers for a fee and through licensing the CrossFit trademark and
other intellectual property to affiliate gyms. The NSCA is a nonprofit
corporation that is “dedicated to the educational and professional exchange of
ideas in the areas of strength development, athletic performance, and fitness.”
It offers educational publications and also certifies fitness professionals for
a fee. One of the NSCA’s publications is its “flagship journal,” the Journal of
Strength and Conditioning Research (JSCR).

In November 2013, the JSCR published “Crossfit-based high
intensity power training improves maximal aerobic fitness and body composition.”
Though much of the article praised CrossFit’s effectiveness, one passage says:

Out of the original 54
participants, a total of 43 (23 males, 20 females) fully completed the training
program and returned for follow up testing. Of the 11 subjects who dropped out
of the training program, two cited time concerns with the remaining nine
subjects (16% of total recruited subjects) citing overuse or injury for failing
to complete the program and finish follow up testing.

Revisiting the point, the article says, “[a] unique concern
with any high intensity training programs such as HIPT or other similar
programs is the risk of overuse injury. In spite of a deliberate periodization
and supervision of our Crossfit-based training program by certified fitness
professionals, a notable percentage of our subjects (16%) did not complete the
training program and return for follow-up testing.” The study received attention in social media
outlets and from news media.

CrossFit identified the individuals who purportedly did not
complete the study because of “overuse or injury,” and many of these
individuals provided declarations explaining their actual reasons for not
completing the challenge, which weren’t based on overuse or injury. The initial
manuscript submitted to the JSCR did not include any injury data, and the study’s
author said that he only included them after “the peer reviewers and JSCR
editors requested information about why 11 participants failed to test out.”
CrossFit argued that the inclusion of these data at the JSCR editorial staff’s
direction was evidence of the NSCA’s desire to “manufacture a ‘scientific’
study concluding CrossFit training was unsafe.” JSCR’s Managing Editor wrote: “You
also need to caution readers as to the context of your findings due to the fact
many people do get injured doing these types of workouts,” directing the study’s
author to another study finding CrossFit to be dangerous, authored by the
Managing Editor himself.

The JSCR published an erratum stating:

After the article was published, 10
of the 11 participants who did not complete the study have provided their
reasons for not finishing, with only 2 mentioning injury or health conditions
that prevented them from completing follow-up testing. In light of this
information, injury rate should not be considered a factor in this study. This
change does not affect the overall conclusion of the article.

CrossFit submitted a consumer survey on materiality. Some
participants saw the original statement reporting a 16% injury rate and others saw
a modified version with the language “CrossFit’s programs injury rates are very
much in line with injury rates for the physical fitness industry as a whole.”
Respondents exposed to the former “[w[ere 2.4 times as likely to rate CrossFit
training as dangerous,” and were “twice as unlikely to say they would purchase
a 12 month trial membership for CrossFit training.”

The court granted summary judgment on literal falsity,
though other elements of CrossFit’s claims remained. In particular, the NSCA argued that the
journal article was noncommercial speech fully protected by the First Amendment
and not subject to the Lanham Act.

The court noted that speech can be commercial even when it
contains “discussions of important public issues.” Further, courts must be
particularly careful when reviewing causes of action directed toward academic
works, “because academic freedom is ‘a special concern of the First Amendment.’
“ ONY, Inc. v. Cornerstone Therapeutics, Inc., 720 F.3d 490 (2d Cir. 2013). However, ONY
was careful to limit its scope to cases in which “a speaker or author draws
conclusions from non-fraudulent data, based on accurate descriptions of the
data and methodology underlying those conclusions, on subjects about which
there is legitimate ongoing scientific disagreement.” ONY
noted that “it is relevant that plaintiff does not allege that the data
presented in the article were fabricated or fraudulently created.” Query: Why does falsity of data bear on the
classification of the article as commercial or noncommercial speech? ONY actually
doesn’t present itself as a commercial speech case—defendants were allowed to
make their claims, as long as they were accurate descriptions of the data and
methodology, in classic ads too.
Nonetheless, the court here held:

a reasonable fact finder could
conclude that the NSCA fabricated the injury data and published them in the
JSCR knowing they were false with the intention of protecting its market share
in the fitness industry and diminishing the burgeoning popularity of the
CrossFit program. If the trier of fact were to draw that conclusion from the
evidence, the injury data would be commercial speech.

Analytically speaking, this puts the cart before the horse—you
only know if it’s commercial speech once you know it’s false. (Next query: what if this wasn’t knowing
falsity, just falsity, which is generally sufficient under the Lanham Act and
which the court has already found to exist?
Why would state of mind be relevant to whether this is commercial
speech?) It might be a reasonable
practical compromise, however, especially given that I’m no great fan of ONY.

The court here continued that the paper as a whole was far
more than a proposed commercial transaction, “but the excerpts based on
potentially fabricated data about a competitor’s product may nonetheless be
commercial speech.” A reasonable fact finder

could conclude that the NSCA
pressured the authors to include data disparaging CrossFit’s exercise regimen,
and the editor-in-chief’s admonition—“[r]emember the paper can still be
rejected if the reviewers are not impressed with the sophistication of the
revisions made”—could be construed as a veiled threat that the JSCR would not
be interested in publishing the Devor Study if it did not include information
showing “the fact many people do get injured doing these types of workouts,”
whether or not that “fact” was true in this qualitative study.

However, a reasonable factfinder could also conclude that “the
editor-in-chief was simply bringing his knowledge of the fitness industry to
bear and sincerely believed (or for that matter still believes) that CrossFit
has a high injury rate, as opposed to an attempt to denigrate CrossFit for the
NSCA’s benefit.”

Under the Bolger
factors, the study didn’t explicitly promote the NSCA’s products or services, and
wasn’t typical advertising content. The factor dealing with reference to a
specific product, though typically geared to self-promotion, could also apply
to disparagement of another’s product, especially given that the Lanham Act
explicitly reaches such disparagement.
And NSCA had an economic motive for publishing the data. Nor were the noncommercial elements of the
study inextricably intertwined with commercial speech:

[A]ssuming the injury data were
false and injected into the article to deride CrossFit’s product, it would have
been easy enough to publish an article with data that were not made up, and one
could easily imagine the Devor Study without the statements premised on these
false data. In fact, the Erratum shows that the parts of the article that may
constitute commercial speech are not inextricably intertwined with the
remainder of the article.

The court also allowed California FAL and trade libel claims
to proceed. Though trade libel usually
requires a showing of special damages, some cases have allowed plaintiffs to
show instead a “general loss of custom[ers],” by “showing an established
business, the amount of sales for a substantial period preceding the
publication, the amount of sales subsequent to the publication, [and] facts
showing that such loss in sales were the natural and probable result of such
publication.” CrossFit might be able to
satisfy that standard.

The FTC and Connecticut sued LeadClick over its role in the
use of deceptive websites to market weight loss products. LeadClick managed a
network of aﬃliates/publishers to advertise the products of LeadClick’s
merchant client, LeanSpa. Some
affiliates created deceptive websites making false efficacy claims, including
claims about independent testing and testimonials. The FTC also sued CoreLogic, LeadClick’s parent company, as a
relief defendant. The court of appeals rejected LeadClick’s §230 defense, but
did let CoreLogic off the hook for $4.1 million in relief.

Facts: Until it went out of business in 2011, LeadClick
operated an affiliate‐marketing network, connecting
merchant clients to third‐party publishers/affiliates who
advertised the merchant’s
products. The affiliates used email marketing, banner ads, search‐engine
placement and websites they created. LeadClick managed the affiliate network
through tracking software, referred to as “HitPath,” that would “track the flow
of traffic from each individual affiliate’s marketing website to the merchant’s
website while remaining invisible to the consumer.”

LeadClick’s affiliate managers were responsible for scouting
and recruiting new affiliates, researching affiliates, and matching affiliates
with particular merchant offers. “LeadClick would review and control which
affiliates were selected to provide online advertising for each merchant’s
offer.” LeadClick also was a media
buyer: it bought space for banner ads from well-known websites, then resold the
space, sometimes to affiliate marketers, at a markup.

LeanSpa hired LeadClick in September 2010. LeanSpa paid a set amount, typically $35 to
$45, each time a publisher’s
ad led a consumer to LeanSpa’s
landing page and that consumer enrolled in LeanSpa’s free‐trial
program. LeadClick paid 80-90% of that
to the publisher and kept the rest. To track individual consumer actions,
LeadClick routed consumers through the HitPath server to the LeanSpa website
via publisher-unique links.

LeadClick became LeanSpa’s primary marketing network, and
LeanSpa became LeadClick’s top customer, responsible for about 85% of all
eAdvertising division sales, or $22 million in billing. LeanSpa was chronically behind on its
payments to LeadClick, but ultimately paid LeadClick $11.9 million. Following industry practice, LeadClick paid
publishers before getting paid by LeanSpa, and ultimately terminated its
business arrangement with LeanSpa.

Some of LeadClick’s affiliates used fake news sites, which “looked
like genuine news sites: they had logos styled to look like news sites and
included pictures of supposed reporters next to their articles.” Theygenerally
represented that a reporter had performed independent tests that demonstrated
the efficacy of the weight loss products and included a “consumer comment”
section, where fake “consumers” praised the products. The vast majority of LeadClick traffic to
LeanSpa’s websites came from fake news sites.

The evidence showed that LeadClick (1) knew that fake news
sites were common in the affiliate marketing industry and that some of its
affiliates were using fake news sites, (2) approved of the use of these sites,
and, (3) on occasion, provided affiliates with content to use on their fake
news pages. For example, one LeadClick employee told an affiliate interested in
marketing LeanSpa offers that “News Style landers are totally fine.” Another
employee told a potential new client that “[a]ll of our traffic would be
through display on fake article pages.” LeadClick’s standard contract with
affiliate marketers also required affiliate marketers to submit their proposed
marketing pages to LeadClick for approval before they were used.

LeadClick employees also requested content edits to some
fake news sites. For example, after
hearing of a state action against another network for false advertising, a
LeadClick employee reached out to an affiliate to “make sure all [his] pages
[were] set up good[,] like no crazy [misleading] info.” The affiliate responded
that he was removing references to his page being a “news site” and thinking of
“removing the reporter pics” from the site to be safe. The LeadClick employee advised him not to
stop using the fake reporter’s picture, but to “just add [the term]
advertorial.” Another time, LeadClick employee advised the affiliate to delete
references to acai berry on his fake news site and instead use words like “special
[ingredient], formula, secret, bla, bla, bla” because “we noticed a huge
increase in [actions] with stuff that doesn’t [s]ay acai.” Providing feedback on another page, another
employee stated that the site “looks good except you CANT say anything about a
free trial.. [sic] I need that removed,” and noted that “[i]t is much more
realistic if you say that someone lost 10‐12 lbs in 4 weeks rather than
saying anything more than that.”

LeadClick also sometimes purchased ad space on genuine news
sites for banner ads that would link to the fake news sites promoting LeanSpa’s
products as part of its media buying business.
LeadClick sometimes identified fake news sites as destination pages for the
banner ads when negotiating with media sellers by emailing the media seller a
compressed version of an affiliate’s page or providing the web address for the
destination page.

LeadClick argued that it couldn’t be held liable under
Section 5(a) of the FTCA because it didn’t create the deceptive content, and
the content wasn’t attributable to it.
The court of appeals responded that, “under the FTC Act, a defendant may
be held liable for engaging in deceptive practices or acts if, with knowledge
of the deception, it either directly participates in a deceptive scheme or has
the authority to control the deceptive content at issue.” This is consistent with the case law in other
circuits, which also hold that “a deceptive scheme violating the FTC Act may
have more than one perpetrator.” The
rule that a defendant who knows of another’s deceptive practices and has the
authority to control those deceptive
acts or practices, but allows the deception to proceed, can be liable is
consistent with the longstanding rule that “an omission in certain
circumstances may constitute a deceptive or unfair practice.” (Very nice equivocation on the meaning of “omission,”
which in this context usually refers to an omitted statement, not an omitted action.)

Though the FTCA doesn’t expressly provide for aiding and
abetting liability, that wasn’t the kind of liability being imposed. A defendant with knowledge of deception who
directly participates or who has the authority to control the deceptive
practice, but doesn’t, is itself engaged in an deceptive practice.

That standard was satisfied here, as the evidence showed.
Direct participation was shown by the facts that a LeadClick employee “scouted”
fake news websites to recruit potential affiliates for the LeanSpa account; LeadClick
employees required alterations to the content of its affiliates’ fake news
pages by instructing them to revise their pages to comply with explicit
directives from LeanSpa; a LeadClick employee instructed an affiliate to check
that his fake news site was not “crazy [misleading]” and advising him not to
remove the reporter photograph, but to “just add advertorial”; LeadClick
employees advised affiliates on the content to include in their pages to
increase consumer traffic (telling an affiliate “[i]t is much more realistic if
you say that someone lost 10‐12 lbs[.] in 4 weeks rather than
saying anything more than that”); and LeadClick purchased banner ad space on
genuine news sites to resell that space to affiliates running fake news pages
to “generat[e] quality traffic in very lucrative placements.”

Likewise, LeadClick had the authority to control the
deceptive practices of affiliates that joined its network, but didn’t. Ultimately, “[a]s the manager of the
affiliate network, LeadClick had a responsibility to ensure that the
advertisements produced by its affiliate network were not deceptive or
misleading. By failing to do so and allowing the use of fake news sites on its
network, despite its knowledge of the deception, LeadClick engaged in a
deceptive practice for which it may be held directly liable under the FTC Act.” Moreover, LeadClick was directly liable “regardless
of whether it intended to deceive consumers ‐‐ it is enough that it
orchestrated a scheme that was likely to mislead reasonable consumers.”

What about the CDA? Under §230, a provider of an interactive
computer service won’t be held responsible “unless it assisted in the
development of what made the content unlawful.”
See FTC v. Accusearch Inc.,
570 F.3d 1187 (10th Cir. 2009). The
court here doubted whether LeadClick was even an interactive service provider,
because it didn’t provide “computer access in the sense of an internet service
provider, website exchange system, online message board, or search engine.” Its routing of consumers from its affiliates’
webpages to LeanSpa’s websites via the HitPath server “was wholly unrelated to
its potential liability under the statute”—that is, none of the acts for which
it was being held liable depended on the fact that it provided that routing,
which was just done to keep track of who it was supposed to pay. If it had contracted out that function, it
would still have been the actor responsible for all the acts the court
previously deemed to justify direct liability.

More disturbingly, the court reasoned that this “service”—access
to the HitPath server—wasn’t the kind of activity Congress intended to protect
in granting immunity, because the routing “was invisible to consumers and did
not benefit them in any way. Its purpose was not to encourage discourse but to
keep track of the business referred from its affiliate network.”

But none of this matters, because LeadClick was an
information content provider with respect to the content at issue. It
participated in the development of the deceptive content: it recruited
affiliates for the LeanSpa account that used false news sites; it paid those
affiliates to advertise LeanSpa products online, knowing that false news sites
were common in the industry (if this is participation, §230 protection is a
dead letter); it occasionally advised affiliates to edit content on affiliate
pages to avoid being “crazy [misleading],” and to make a report of alleged
weight loss appear more “realistic”; and it bought ad space from legitimate
news sites, “thereby increasing the likelihood that a consumer would be
deceived” by the fake news sites.
LeanClick’s managerial role “far exceeded that of neutral assistance.”

Further, LeadClick wasn’t being held liable as a publisher
or speaker of another’s content, but for its own deceptive acts or
practices. This is a version of the
agency argument I’ve made before, I think, but it means we have to be very
careful about when failure to act (omission) counts as a deceptive act or
practice. Here, the court reiterated that LeadClick’s own conduct was “providing
edits to affiliate webpages, … purchasing media space on real news sites with
the intent to resell that space to its affiliates using fake news sites, and [having]
the authority to control those affiliates and allow[ing] them to publish
deceptive statements.” I imagine Eric Goldman
will be none too pleased, but it does seem significant that the editing
suggested was to increase deceptiveness, not just to increase the
attractiveness of the content.

Finally, relief defendant liability: In 2005, CoreLogic’s
predecessor bought LeadClick (as an indirect owner through its wholly owned
subsidiary CLUSI). In 2010, LeadClick became a direct subsidiary of CoreLogic,
and a sister company to CLUSI. During
the restructuring, CoreLogic transitioned LeadClick and six of its sister
subsidiaries into a “shared services system” to streamline and enhance back
office functions across the subsidiaries. Shared services programs allow
related entities to consolidate some or all of their back‐office
functions, such as accounting, legal and compliance, human resources, and
information technology, into a single office.

When LeadClick accrued a payable expense, CoreLogic would
make the payment directly on its behalf, and track the payment as an advance to
LeadClick. Both LeadClick and CoreLogic intended that LeadClick would later
reimburse CoreLogic for those advances, and ultimately LeadClick repaid a total
of $8.2 million of its advance balance to CoreLogic. Half of this amount was repaid in a single
cash transfer of $4.1 million in August 2011, the month before LeadClick ceased
business. The district court treated
that transfer as gratuitous and held CoreLogic liable as a relief defendant.

The court of appeals found that CoreLogic was not an
appropriate relief defendant because CoreLogic had a legitimate claim to repayment
of its prior advances to LeadClick. A
relief defendant needs a legitimate claim, which can be based on an outstanding
loan, but not on a gratuitious transfer.
Though CoreLogic lacked a formal loan agreement, the transfer of $4.1
million was the repayment of an outstanding
intercompany loan, implemented as part of its shared services agreement under
which CoreLogic had previously paid LeadClick’s accounts payable. Shared
services agreements generally don’t involve formal debtor-creditor
relationships, since such documentation “is incompatible with the very purpose
of shared services: streamlining operations and increasing efficiency by
reducing excess paperwork.” Because the companies were consolidated under
general accounting principles for public companies, an interest charge would be
inappropriate. “Under these circumstances, the lack of a formal loan agreement
does not create suspicion that the transactions were a sham.”

Actors who played doctors on TV evoke their roles for Cigna ad: any false endorsement implications for Cigna? Tagline: “They’ve saved lives on TV, but now they’re helping save lives for real by teaming up with Cigna to encourage America to get an annual check-up. Get ready to go, know and take control of your health with the TV Doctors of America.”

LoggerHead sued Sears under the Lanham Act and Illinois
state law for false advertising; the court granted summary judgment to
Sears. LoggerHead sells a hand tool, the
Bionic Wrench, which Sears sold from 2009.
In 2012, Sears sought a Bionic Wrench replacement to be sold under the
Sears Craftsman brand and sent LoggerHead’s patent to a patent lawyer, who
identified another patented tool that could be used as a model for a
replacement wrench and that (he opined) would not infringe. In late 2012, Sears began retailing the Max
Axess Locking Wrench (MALW).

In DTC ads for the MALW, Sears stated: “[i]f you want
maximum versatility in a single wrench, then you’ll love the latest innovation
from Craftsman, the Max Axess Locking Wrench.” The product packaging for the
MALW shows a picture of the wrench, the term “Unique Design,” and, underneath
that, the phrase “Adapts to a wide range of fastener sizes and grips fasteners
on all sides to prevent rounding.” The packaging also contains a dotted line
going from the writing to the picture of the wrench. Sears issued a press release with similar
claims.

Craftsman package

LoggerHead argued that, taken in context, these features
were literally false: (1) the “Unique Design” statement, (2) “Adapts to a wide
range of fastener sizes and grips fasteners on all sides to prevent rounding”
statement, (3) the illustration of the MALW and (4) the white line connecting
them. First, because the MALW copied its
design from the Bionic Wrench, it wasn’t unique. Second, the “unique” claim was
connected to the claim, “Adapts to a wide range of fastener sizes and grips
fasteners on all sides to prevent rounding,” also false as a uniqueness claim,
as was the connection between the “unique” claim and the image of the MALW’s
tool head.

The court found no literal falsity in the uniqueness claim “given
that there are admitted differences between the MALW and the Bionic Wrench.” Plus, “unique” has previously been deemed
puffery. Although “unique design” might
not be literally false, it could be misleading, but LoggerHead didn’t provide
any consumer perception evidence.

What about “latest innovation from Craftsman” in the ads? Sears argued that this couldn’t be false
advertising because of Dastar, but the
Supreme Court did not “hold that a false claim of origin is the only way to
violate [the Lanham Act].” Gensler v. Strabala, 764 F.3d 735, 736 (7th Cir.
2014). Still, this statement wasn’t literally false, since it didn’t say what
the innovation was, and courts have also found “innovative” to be puffery.

As for the press release, LoggerHead argued that it falsely stated:
“Despite some visual similarities to other tools on the market, Craftsman Max
Axess Locking Wrench operates in a different way, using a mechanism design[ed]
in the 1950s.” LoggerHead claimed literal falsity because the MALW uses a mechanism
designed by LoggerHead, and also alleged that the press release falsely implied
that the MALW is made in America, when it is made in China.

Sears argued that the press release wasn’t commercial
advertising or promotion. The court
thought that the press release had characteristics of commercial speech
(product references, economic motivation for the speech) despite not being in a
traditional ad format, but there was no evidence that the press release was sufficiently
disseminated to the relevant purchasing public, even though it was posted on
Sears’ website.

As for falsity, the press release didn’t say that the MALW
was made in America and LoggerHead didn’t explain why the release was
misleading on that point. The phrase “operates in a different way” was
subjective and not literally false, since the MALW concededly contains some
features that the Bionic Wrench does not, such as a locking mechanism.

Wednesday, September 21, 2016

[P]laintiff argues that the “race
of the characters in the [Film] is irrelevant to the total concept and feel of
a film about relationships.” Plaintiff would be correct if the Film were just
about relationships. But it is not, and plaintiff’s say-so does not overwhelm
the plain meaning of the work. The Film depicts the protagonist’s journey from
a particular perspective: that of an African-American woman in a predominantly
African-American community. The Film repeatedly references and dramatizes
generations of African-American women, and in the background of one scene, the
observer hears an excerpt from a speech by Malcolm X to the effect that the
Black woman is the most “neglected” person in America. This all takes place against
what defendants accurately characterize as a “Southern Gothic feel.” The
settings transition between areas of New Orleans, the abandoned Fort Macomb,
and an Antebellum plantation. These significant differences in characters,
mood, and setting further distinguish the total concept and feel in the Film
from that in Palinoia.

In an opinion that goes from Voltaire to Taylor Swift to
Oscar Wilde to Andy Warhol (that last one is just showing off), the court
rejects the claim of substantial similarity between plaintiff’s 7-minute film
about the aftermath of a relationship and Beyoncé’s Lemonade
film and trailer. Here, enjoy some more
references from the opinion:

Plaintiff also argues that because
the works all “portray a struggle of a relationship; the reasons for such
struggle are unclear and irrelevant.” This is like saying that Casablanca, Sleepless in Seattle, and Ghostbusters
are substantially similar despite the different motivating forces behind the
struggles there portrayed (Nazis, capitalism, and ghosts, respectively). But “all
fictional plots, when abstracted to a sufficient level of generalization, can
be described as similar to other plots,” and that is why the differences do in
fact matter.

Tuesday, September 20, 2016

Forney makes retail metalworking parts and accessories and
claimed a protected trade dress in the coloration of its packaging, described
as:

a combination and arrangement of
colors defined by a red into yellow background with a black banner/header that
includes white letters. More specifically, the Forney Color Mark includes red
and yellow as the dominate [sic] background colors. Red typically starts at the
bottom of the packaging, continues up the packaging and may form borders. Red
may also be used in accents including but not limited to lettering. Yellow
typically begins higher than the red and continues up the packaging. Yellow may
also provide borders and be used in accents including but not limited to
lettering. A black banner is positioned toward the top of the package label or
backer card. Black may also be used in accents including but not limited to
lettering. White is used in lettering and accents.

Here are five pictures of its packaging over the years,
reproduced below with Forney’s caption for each:

Four Forney designs

one more Forney design

Forney alleged infringement by Daco, as shown here:

Allegedly infringing packages side by side with Forney

The court of appeals affirmed, holding that “Forney’s use of
color, which was not associated with any particular shape, pattern, or design,
was not adequately defined to be inherently distinctive,” and Forney failed to
show secondary meaning.

The court noted that courts have generally struggled to find
a test for inherent distinctiveness of non-word marks, given that Abercrombie doesn’t translate very
well. “[I]t may be useful to supplement
that test with the test first introduced in Seabrook Foods, Inc. v. Bar–Well
Foods Ltd., 568 F.2d 1342, 1344 (C.C.P.A. 1977)”: (1) “whether it was a
‘common’ basic shape or design,” (2) “whether it was unique or unusual in a
particular field,” and (3) “whether it was a mere refinement of a
commonly-adopted and well-known form of ornamentation for a particular class of
goods viewed by the public as a dress or ornamentation for the goods.” But the Supreme Court has never adopted a
test; Taco Cabana explicitly noted
that the question of whether the restaurant trade dress there was inherently
distinctive was not before the Court.

We do know that color alone and product design can’t ever be
inherently distinctive, and Wal-Mart’s
other statements about avoiding strike suits and preserving competition are
instructive about “the need for clear rules about what can be inherently
distinctive.” Seabrook, the Court specifically noted, “would rarely provide the
basis for summary disposition of an anticompetitive strike suit.” The Court also pointed to the availability of
copyright and design patent as a reason not to worry too much about protecting
design, and told lower courts to err on the side of classifying ambiguities as
product design, thus requiring secondary meaning.

Based on these considerations, the court of appeals here
ruled that “the use of color in product packaging can be inherently distinctive
(so that it is unnecessary to show secondary meaning) only if specific colors
are used in combination with a well-defined shape, pattern, or other
distinctive design.” This rule is
consistent with the case law; cases involving a color scheme or palette “in
isolation” have turned on secondary meaning. E.g., Board of Supervisors for Louisiana State University
Agricultural and Mechanical. College. v. Smack Apparel Co., 550 F.3d 465 (5th
Cir. 2008). McCarthy agrees: “whether
color is confined to a defined design can determine whether inherent
distinctiveness is a possible alternative to proving secondary meaning.”

Here, Forney was out of luck. It didn’t sufficiently articulate the
protectable elements of its claimed mark.
This is especially important for product lines where the features aren’t
identical across products. A “vaguely
defined” trade dress shouldn’t be protected.
Such a trade dress would complicate litigation; “courts will be unable
to evaluate how unique and unexpected the design elements are in the relevant
market.” Moreover, if descriptions are vague, “jurors viewing the same line of
products may conceive the trade dress in terms of different elements and
features, so that the verdict may be based on inconsistent findings.” Nor would
courts be able to shape narrowly-tailored relief without a clear
definition. Perhaps most important, if
courts can’t identify infringing designs, competitors certainly wouldn’t be
able to know what might draw a lawsuit.

Regardless, Forney’s description did not comport with the
court’s requirement that the color scheme be used in combination with a
well-defined shape, pattern, or other distinctive design. Forney used words
like “typically” and “may” in its description, and that wasn’t due to lack of
proper drafting by counsel. “It is probably the best that one could do, given
the variety of packaging that Forney has used on its products over the years.” Without a consistent shape, pattern, or
design, “[p]articularly in light of the Supreme Court’s instruction to be
cautious about applying vague, litigation-friendly tests for inherent
distinctiveness, we conclude that Forney has failed to establish an inherently
distinctive trade dress.”

Forney also didn’t have sufficient evidence of secondary
meaning. Its extensive promotional and
advertising efforts weren’t probative because “advertising alone is typically
unhelpful to prove secondary meaning when it is not directed at highlighting
the trade dress.” Here the district court found that Forney’s advertising
“utterly fails to mention the Color Mark, or to emphasize it in any fashion.” Sales data were similarly unhelpful. Testimony about exclusive use for twenty
years also wasn’t enough to survive summary judgment, even though extensive exclusive
use could support a finding of secondary meaning. First, the testimony was conclusory, and didn’t
even claim uniqueness, just that Forney’s products using the claimed mark “were
uncontested, extensive and exclusive for 20 years.” Forney also submitted pictures
of four packages from its “primary” competitors that use different colors. But defendants submitted several pictures showing
product packages in the retail-metalworking sector that bear a close
resemblance to Forney’s product packaging.

More importantly, there wasn’t continuous exclusive use of a
definable trade dress. Forney’s packaging changed significantly over 20 years. “How
then is a consumer supposed to have come to associate the packaging with Forney?”

JP Homes sued Trademark, its principal, and homeowners for
alleged violations of the Lanham Act and copyright infringement. JP Homes alleged that it designs and builds
custom homes, and that defendants copied and improperly appropriated original
elements of JP Homes’s copyrighted work in one such home design, The
Martinique. Further, Trademark allegedly used photos of a house designed by JP
Homes in advertising its own products. JP Homes sought to halt the construction
of the homeowners’ in-progress house and have it torn down or modified
sufficiently so as not to infringe.

The court first rejected defendants’ arguments that the
court lacked jurisdiction/JP Homes lacked standing. The court determined that
this was a statutory standing question, not an Article III question, and thus
governed by Lexmark under Rule 12(b)(6).
Although JP Homes alleged that it was in the Lanham Act’s zone of interests,
Trademark argued that JP Homes failed to plead facts showing injury or
proximate causation, and that its allegations were merely speculative. The
court disagreed. JP Homes alleged that
Trademark wrongly received recognition as a good builder because of its
copying; that the parties competed in the same area; and that the statements
were likely to materially mislead consumers.
This was a classic false advertising claim, and the allegations that JP
Homes suffered competitive or reputational injury as a result of Trademark’s
conduct were not too remote.

Further, while JP Homes didn’t specify an amount of actual
loss, that wasn’t required. Lexmark
says that “potential difficulty in ascertaining and apportioning damages is
not...an independent basis for denying standing where it is adequately alleged
that a defendant’s conduct has proximately injured an interest of the
plaintiff’s that the statute protects.” JP Homes might be entitled to
injunctive relief or disgorgement of defendant’s profits even if it couldn’t
quantify its losses with enough certainty to get damages.

Turning to JP Homes’ motion for TRO/Preliminary Injunction,
the court found that JP Homes failed to show irreparable injury. JP Homes argued that likely success on a
copyright claim raised a presumption of irreparable harm, but the Fifth Circuit
never adopted that rule. (No discussion
of eBay v. MercExchange.) JP Homes also argued that continuing
infringement/construction of the house exposed it to the permanent loss of
customers or lost goodwill. But JP Homes provided no evidence of this, only
conclusory assertions. JP Homes also
didn’t explain why its damages would be unquantifiable or why money wouldn’t be
adequate compensation. JP Homes
requested actual damages or statutory damages in its complaint, suggesting that
it could develop a basis for a damage award.
(Careful about pleading in the alternative when it comes to irreparable
harm.)

Reiterating its claims as arguments about damage to JP Homes’
“competitive position and brand” was unhelpful.
JP Homes didn’t allege wholesale copying of many of its key designs, but
copying of a single work that wasn’t even identical copying. Claims that harm to JP Homes in the community
where that house was being built would spread elsewhere were “purely
speculative.” “While courts are willing
to entertain a loss of customers or goodwill as a harm, the movant must come
forward with evidence that such an injury is irreparable by showing that the
loss cannot be measured in money damages and monetary damages would be
inadequate.”

Arguments that JP Homes would be harmed if Trademark builds
its designs at a lower price and quality, and that JP Homes’ reputation for
uniqueness would be damaged because potential customers would see its designs
as “common or run-of-the-mill” also failed. First, there was no evidencce that
Trademark’s building was
lower-quality. Also, the alleged use of
one design wasn’t enough to interfere with JP Homes’ “ability to market its
designs and building services to potential customers for other architectural
plans.” Moreover, its claims that
Trademark’s failure to attribute the design would cause JP Homes to lose
business contradicted its argument that JP Homes would lose customers if people
found out that Trademark was building a lower-quality version of the
Martinique.

Finally, JP Homes’ delay in seeking relief weighed against
an injunction. As early as December
2015, an employee of JP Homes learned that the homeowners were not going to
move forward with JP Homes building their home and had visited a real estate
agent who refers customers to builders that often use architectural plans
created by others. She allegedly warned them
(through their new real estate agent) to refrain from using any part of the
architectural plan created by JP Homes. The agent allegedly responded by asking
what percentage of the plan designed by JP Homes would have to be changed to
not be considered the same plan. Nonetheless, JP Homes waited until June 2016
before filing suit and seeking injunctive relief, after construction on the
McWhorters’ house was well underway.
Meanwhile, JP Homes submitted its registration materials for the
Martinique to the Copyright Office, and threatened to take legal action in
April 2016. JP Homes’ “unexplained and
undue delay of approximately six months strongly undercuts its claim of
irreparable harm and contention regarding the need for urgent relief.”

Monday, September 19, 2016

Plaintiffs sued NAC Marketing Company and Joe Theismann for their
advertising statements about NAC’s Super Beta Prostate product, bringing
warranty claims as well as the usual California statutory claims. Because one plaintiff’s individual claim for
monetary relief was unpaid when he joined the lawsuit, he satisfied the injury
in fact requirement and had standing to sue under Campbell–Ewald Co. v. Gomez,
–––U.S. ––––, 136 S.Ct. 663 (2016). This portion of the case was remanded for
further proceedings, though plaintiffs lacked standing to pursue injunctive relief
because they didn’t allege any intent to purchase the product in the future and
couldn’t show a likelihood of future injury.

As for Theismann, he was “merely the celebrity spokesperson
for NAC and not the seller of SBP,” the district court properly dismissed the
claims against him, given the California Commercial Code’s definition of a
seller as “a person who sells or contracts to sell goods” and a sale as “the
passing of title from the seller to the buyer for a price”; Theismann never had
or passed title to the product.

Query whether secondary liability could be appropriate in the right circumstances. What level of fault would be appropriate for a celebrity spokesperson?

Mars sells chocolate, some of which comes from cocoa beans
from Côte d’Ivoire, where trafficked children and forced laborers “wield
dangerous tools, transport heavy loads, and face exposure to toxic substances….The
working conditions on the farms are deplorable. Laborers often do not receive
pay, sleep in locked quarters, and fear corporal punishment.” Despite an agreement with other chocolate
manufacturers in 2001, Mars and other signatories haven’t been able to
implement certification procedures to eradicate the worst forms of child labor
on cocoa farms. “According to the most recent reports, the number of children
working on cocoa farms has increased since 2005. As of 2014, ‘[o]nly 36% of [Mars’s]
cocoa was certified.’”

Most of Mars’ chocolate products don’t say anything about
the supply chain, though the label for Dove chocolates says, “We buy cocoa from
Rainforest Alliance Certified farms, traceable from the farms into our
factory.” Hodsdon alleged that he “would not have purchased” or “paid as much
for” Mars chocolate products had the labels included information about the
labor practices of Mars’s cocoa suppliers.

The court found that these allegations properly alleged
standing by alleging actual reliance and economic injury. Hodsdon didn’t need to allege that he bought
chocolate containing cocoa beans harvested by children or forced laborers; his
alleged economic injury was sufficient.
Nor did he need to trace any of Mars’s chocolate to particular farms
that use the objectionable labor practices.
His allegations clearly permitted the inference that he relied on the
nondisclosure when buying. “Hodsdon ties
his harm to the lack of certainty about the source of the cocoa beans, not to
consumption of cocoa products actually harvested by child and forced laborers.
In so doing, he has established injury in fact.”

But do California’s consumer protection laws cover
omissions? The FAL bans “mak[ing] or
disseminat[ing]...any statement...which is untrue or misleading, and which is
known, or by the exercise of reasonable care should be known, to be untrue or
misleading...” “with intent directly or indirectly to dispose of real or
personal property.” Courts are divided on whether omissions can violate the
FAL, but the court here held that the decisions could be harmonized by looking
at whether the defendant made any statement at all about a subject; if it does,
then it is responsible for material omissions made about that subject that
render the affirmative statements misleading.
If it stays mum, however, there is no FAL liability. That was the case here.

How about the CLRA and the UCL? The CLRA bans “unfair methods of competition
and unfair or deceptive acts or practices undertaken by any person in a
transaction intended to result or which results in the sale or lease of goods
or services to any consumer,” and prohibits conduct “likely to mislead a
reasonable consumer,” The UCL prohibits “unfair competition” defined as “any
unlawful, unfair or fraudulent business act or practice and unfair, deceptive,
untrue, or misleading advertising.” In order to prevail, Hodsdon needed to show
that Mars had a duty to disclose the information. Mars argued that there was no duty to dislose
information unrelated to a safety issue or product defect. Hodsdon argued that
such a duty arises when “the defendant had exclusive knowledge of material
facts not known to the plaintiff.”

“California courts have generally rejected a broad
obligation to disclose,” except for omissions that are “‘contrary to a
representation actually made by the defendant, or...omission[s] of a fact the
defendant was obligated to disclose.’” The California Court of Appeal has held
that a defendant did not have a duty to disclose product defects that did not
pose any risk of physical injury or safety concerns. Another case said the duty to disclose exists
when “(1) when the defendant is in a fiduciary relationship with the plaintiff;
(2) when the defendant had exclusive knowledge of material facts not known to
the plaintiff; (3) when the defendant actively conceals a material fact from
the plaintiff; and (4) when the defendant makes partial representations but
also suppresses some material fact.”
However, the overwhelming authority limited the duty to disclose in
situation (2) to product design/safety issues.
As the court pointed out, “[t]he definition of a material omission has
stunning breadth, and could leave manufacturers (chocolate or otherwise) little
guidance about what information, if any, it must disclose to avoid CLRA or UCL
liability.” This took care of the UCL
“unlawful” and “fraudulent” claims.

As for “unfair,” the definition of this under the UCL is in
flux. Many courts have found a business
practice “unfair” when it “offends an established public policy or when the
practice is immoral, unethical, oppressive, unscrupulous or substantially
injurious to consumers.” This approach requires courts to “examine the
practice’s ‘impact on its alleged victim, balanced against the reasons,
justifications and motives of the alleged wrongdoer.’ ” But this may well be
too amorphous; the public policy test requires that the UCL claim be tethered
to some specific constitutional, statutory, or regulatory provisions.”

The court found that Hodsdon couldn’t show that the failure
to disclose was immoral, unethical, oppressive, unscrupulous or substantially
injurious to consumers. Information about Mars’ labor policies and supply chain
is “readily available to consumers on Mars’s website,” so the absence of
information on the packaging is not immoral even though the underlying labor
practices are. A broader formulation,
which defendants are likely to quote: “Mars’s failure to disclose information
it had no duty to disclose in the first place is not substantially injurious,
immoral, or unethical.” Likewise,
Hodsdon’s alleged harm wasn’t tethered to any “specific constitutional,
statutory, or regulatory provisions.”

Mars also argued that it was entitled to a safe harbor under
the Supply Chains Act, Cal. Civ. Code § 1714.43. “To forestall an action under
the unfair competition law, another provision must actually ‘bar’ the action or
clearly permit the conduct.” The court
was dubious. That law requires retailers
and manufacturers that earn more than $1,000,000 in gross receipts to disclose
their “efforts to eradicate slavery and human trafficking from [their] direct
supply chain for tangible goods offered for sale.” They must post on their website’s homepage “a
conspicuous and easily understood link to the required information,” or provide
“written disclosure within 30 days of receiving a written request for the
disclosure from a consumer.”

First, the SCA was about and human trafficking, not child
labor. “While the distinction between child labor and forced labor may be thin,
the safe harbor doctrine cautions against creating safe harbors in the absence
of ‘specific legislation.’” Plus, the court wasn’t convinced that the
legislature “considered a situation and concluded no action should lie.” Here,
legislative history was silent about whether the legislature considered
disclosures on labels. Plus, if the court accepted the safe harbor reasoning,
then big businesses would be exempt from a disclosure requirement that smaller
businesses not subject to the SCA would have, which would be “anomalous.”

Judge Leval deems this “an exceptionally well argued case,”
noting the same thing I did: Paul Clement for plaintiff Church & Dwight,
Seth Waxman for defendant SPD. (As someone else said, I guess that relative
dearth of SCt cases is really wearing on them.) I previously discussed the
district court decision finding SPD’s over-the-counter pregnancy test to be
falsely advertised here.
This decision happened fast, for the 2d Circuit—it was argued a few months ago.

SPD’s Clearblue Advanced Pregnancy Test with Weeks Estimator
is the first OTC pregnancy test to also furnish information as to how long (how
many weeks) a woman has been pregnant, which it does by measuring the amount of
hCG in her urine. But SPD used the
number of weeks since ovulation, and for reasons both historical and practical
the medical profession universally measures weeks since last menstrual period,
not since ovulation—a two-week difference.
They do this even when IVF is the implantation method and when ultrasound
is used to measure pregnancy duration.
The parties agreed that “when the Defendant’s Product and the woman’s doctor
are in complete agreement in estimating how long the woman has been pregnant,
the Product would announce a number of weeks that is about two weeks lower than
what the doctor would say.” The basic
falsity claim is that Clearblue falsely communicated that it used the same
metric and gives the same number of weeks of pregnancy as a medical
professional would.

Home pregnancy tests are Class II medical devices subject to
the requirements of § 510(k) of the FDCA.
This requires premarket notification to the FDA in order for the FDA to
determine whether the device is “substantially equivalent” to an existing
authorized device. The FDA may,
notwithstanding a substantial equivalence determination, require changes to the
product’s labeling or promotional materials designed to discourage potential
off-label use of the product that might cause harm to consumers.

The FDA initially issued a “hold letter” in August 2012,
expressing a concern that the “weeks indicator feature may provide misleading
information to lay population of users” because it would under-estimate
gestational age by an average of 2 weeks, which users might misinterpret. The
hold letter required SPD to remove the phrase “Also Tells you How Far Along you
Are” from the proposed box. Ultimately,
the FDA issued a clearance letter in December 2012, but required SPD, among
other things, to include a specific “conversion chart” explaining how a doctor
would date the pregnancy compared to the product’s results, using language
provided by the FDA. It also specified that the product’s results could not be
expressed as “weeks pregnant,” but only as the number of weeks since ovulation. In addition, the FDA required an additional
statement that “[t]his test provides a different estimate that cannot be
substituted for a doctor’s determination of gestational age.” Finally, the clearance letter said that the
“FDA’s issuance of a substantial equivalence determination does not mean that
FDA has made a determination that your device complies with other requirements
of the [FDCA] or any Federal statutes and regulations administered by other
Federal agencies.” FDA approval is required to modify or remove anything on the
package.

Original package

side panel

When the product was launched, it used its name—Clearblue
Advanced Pregnancy Test with Weeks Estimator—in large font, along with four
windows, designed to appear similar to the window that appeared on the product
itself. One window showed the word “Pregnant” on the first line and “1-2 weeks”
on the second; and so on. The front and
back of the package didn’t use the word “ovulation,” though one side panel had
the full FDA-required language. The
initial TV ad had the dialogue:

Woman 1: I’m pregnant.

Woman 2: Really?

Woman 1: Two weeks.

Woman 2: You already went to the
doctor?

Woman 1: Not yet, but I took this
new Clearblue test. It’s like two tests in one.

Woman 2: Oh my God, I think I’m
going to cry!

SPD’s website and other advertising was similar. After C&D complained to the FDA, the FDA
told SPD that it was marketing the product in violation of the limits imposed
by the clearance letter. The FDA told
SPD to remove the word “weeks” from the product windows and replace it with
“weeks along” outside the windows.

revised package

The revised package included a gray strip in the top right
corner with the phrase “Only Test That Estimates Weeks Since Ovulation*”. The
asterisk linked to the Indications for Use Statement on the side panel. SPD
complied with the FDA’s instructions about the windows. SPD pulled the TV commercial, but revised the
ad for the internet to remove the discussion of a doctor and Woman 1’s
declaration of how far along she was. SPD also modified its website
accordingly.

On appeal, SPD argued FDCA preclusion, because its marketing
materials had been reviewed and approved through the § 510(k) process. Pom Wonderful was to the contrary. The court of appeals noted that the Pom Wonderful court rejected the
government’s position as amicus that Lanham Act claims are not precluded by the
mere fact that the FDCA covers a product generally, but are precluded in
situations when the FDCA or the FDA, through its regulations, have
“specifically require[d] or authorize[d]” a challenged aspect of a label. Instead, the Court “rejected the proposition
that the FDCA’s or FDA’s regulation of a label creates a ‘ceiling’ that
precludes any further challenges to that label under other statutes.” Such a result would “distort Congress’s
intent to allow the Lanham Act and the FDCA to exist in tandem to serve the
distinct interests each statute protects.”
Competitors have market expertise the FDA lacks. And, as the court of appeals pointed out, the
FDA explicitly warned SPD in its clearance letter that its approval didn’t
constitute a determination of full compliance with the FDCA or other federal
laws.

SPD relied on PLIVA, Inc. v. Mensing, 564 U.S. 604 (2011), which
found preemption of consumer lawsuits against generic drug manufacturers under
state tort laws based on failure to warn, since FDA regulations require generic
drug labels to be the same as their brand-name equivalents. The Court found conflict
preemption even though the defendants could have requested permission from the
FDA to change their labels so as to comply with the state laws. It’s true that SPD will have to get the FDA’s
permission to change its label, but this isn’t a preemption case, and
preclusion involves different interests. “The uniformity concerns that drive
preemption doctrine are not necessarily applicable when two federal statutes
overlap.”

On to falsity. The district court found both falsity by
necessary implication and implicit falsity. Although none of the materials
expressly equated the product’s results with a doctor’s metric, in context,
they unambiguously implied that false message.
(In other words, when there’s a standard definition of a term, you can’t
avoid liability by redefining the word, whether that’s in mouseprint or by
using terms that consumers won’t understand are modifying the usual
meaning. Here, it’s a bit unusual
because consumers have no reason to think about the usual definition of
pregnancy duration, and the usual definition is weird—you start out 2 weeks
pregnant. But there are lots of things
we don’t know the details of—how MPG is calculated, for example—and just rely
on the existence of a standard for.)

SPD argued that its materials were “susceptible to more than
one reasonable interpretation” and thus not unambiguous. It claimed that a
reasonable ordinary person in the market for a home pregnancy test could
understand the claim to measure “weeks” as weeks-since-ovulation/fertilization “without
forming a belief about whether that measure is the same or different from the
convention used by doctors.” (Because
they wouldn’t know they needed to!) The
court of appeals was unpersuaded:

The issue is whether Defendant’s
measurement of weeks would be understood by reasonable consumers to measure by
a different metric than used by the medical profession. If an advertising
message means something different from what reasonable consumers would
understand it to mean, that message can be considered false.…The crucial point
is that a reasonable consumer would have assumed from the text of the Launch
Package, TV Commercial, and other associated advertising that the Product was
not giving a different number than a medical professional would give.

The court of appeals pointed out that the package didn’t “indicate
in any visible or clear way that the Product provides a different measurement
from a doctor’s.” The only mention of
ovulation and of the difference in dating conventions was in the Indications
for Use Statement on the side of the box, and the district court properly found
that this “was too wordy and ‘minuscule’ to render ambiguous the Launch
Package’s message that the Product provides an estimate of weeks-pregnant that
is consistent with the measurement provided by doctors.” So too with the other advertising.

Regardless, the district court also correctly found implied
falsity, given actual evidence of consumer confusion and evidence of SPD’s
intent to deceive. SPD “recognized and
understood that the Weeks Estimator’s result did not align with how doctors
express pregnancy duration and that this misalignment could confuse consumers,”
as extensively detailed by the record.

Notably, the court of appeals singled out statements by
Clearblue’s Brand Manager that, the district court found, indicated a
deliberate attempt to evade FDA limits and convey a false message. As the FTC says, don’t be cute. When discussing promotional materials for
CVS, the brand manager stated that “we can’t actually link together the weeks
and pregnant in the way it was on the last couple. What you can say is the only
test that estimates weeks, or the only test that also estimates weeks, then the
consumer will see Pregnant 1-2 Weeks in the windows and put it together.” In
another email, in response to a suggestion that an advertisement say “Find out
how far along you are,” she wrote, “This is a tricky one, but the FDA doesn’t
actually want us to say that. I think it can be phrased as a question ..., or
we need to use the ‘estimate weeks’ language.”

This evidence of deceptive intent was sufficient to support
a presumption of consumer confusion supporting a finding of implied falsity.

The revised package was still subject to the implied falsity
finding, based on a consumer survey that tested the revised package and found
that “16.0% or 17.3% of participants... answered both that the [P]roduct
estimates the number of weeks a woman is pregnant and that the [P]roduct’s
estimate of weeks is the same as a doctor’s estimate of weeks-pregnant.” SPD’s best argument was that the survey was
flawed because the survey didn’t test whether these beliefs came from respondents’
preexisting erroneous beliefs about the way pregnancy is measured.

But the truckload of evidence that SPD was “aware of this
widespread consumer ignorance and took no effective steps to guard against
misunderstanding of Defendant’s messages attributable to that ignorance” meant
that it wasn’t error to rely on the survey.
Given such ignorance, SPD’s own messaging was deceptive insofar as it did
nothing to tell consumers that what it measuredwas a different measurement from
that used by doctors. “It makes no difference whether the widespread consumer
ignorance predated the Defendant’s Revised Package or was caused by it.” The revised package implied that medical
professionals would measure pregnancy the same way.

Materiality: I thought the Second Circuit was well-settled
that its “inherent quality or characteristic” language was just materiality,
but SPD argued that the district court found only the former. Accepting that
the issue was somewhat unsettled, the court of appeals found that, even if it required
an additional showing that deception was “likely to influence [consumer]
purchasing decisions,” the district court’s findings of likely harm to C&D
satisfied that requirement. “While the
materiality of the falsity and the likelihood of injury to the plaintiff
resulting from the defendant’s falsity are separate essential elements, in many
cases the evidence and the findings by the court that a plaintiff has been
injured or is likely to suffer injury will satisfy the materiality
standard—especially where the defendant and plaintiff are competitors in the
same market and the falsity of the defendant’s advertising is likely to lead
consumers to prefer the defendant’s product over the plaintiff’s.”

Here, the district court expressly found that C&D lost
sales from SPD’s false advertising. “If
consumers, faced with the choice to purchase either the plaintiff’s product or
the defendant’s, are likely to prefer the defendant’s product by reason of the
defendant’s false advertising, the falsity of the defendant’s advertising is
material to the plaintiff’s Lanham Act claim.”
[Query: how does this square with puffery doctrine? Can you show that a
statement isn’t puffery by showing that it’s material?]

The court of appeals found it “entirely reasonable to expect
that, for a significant number of women interested in learning whether they are
pregnant—especially those who have not previously been pregnant or are
otherwise ignorant of the details of the reproductive cycle—the information
that Defendant’s Product will tell them something different from what a doctor
would provide would make them less likely to trust Defendant’s Product, and
more likely to purchase from Plaintiff, Defendant’s closest competitor.” Indeed,
the evidence indicated that this was “precisely the risk that motivated
Defendant to avoid making clear to consumers that its Weeks Estimator gave
information different from what a doctor would give.”

SPD argued that C&D’s lost market share wasn’t due to
falsity, but rather to the important new feature SPD introduced into the market. Even if that was somewhat true, though, the
evidence that concealing the truth improved SPD’s market share was sufficient;
the court hadn’t awarded damages, in any event.
Also, deliberate deception in a two-player market makes a presumption of
injury appropriate, and here the parties were direct competitors in a “sparsely
populated market” in which other brands (manufactured by a co-owner of C&D)
represent only a small portion of the market.

Finally, SPD challenged the scope of the injunction. Among other things, the injunction required
SPD to include with the test a specified forty-one-word statement clarifying
the difference in the estimates, in a particular position and font size; prohibited
SPD from using several phrases in its advertising, such as “weeks pregnant,”
“weeks along,” or “Weeks Estimator”; required SPD to deliver a corrective
notice to all retailers and distributors with a copy of the injunction; required
SPD to publish Internet banner advertising prominently displaying its logo and
stating that a federal court has determined that SPD “engaged in false
advertising”; and required SPD to produce a video explaining the difference
between its product’s and standard pregnancy length estimates and stating that
“a federal court found the manufacturer ... to have engaged in false
advertising,” and to make it prominently available on Defendant’s webpages,
YouTube channels, and Facebook page.

SPD argued that the corrective notices were excessively
harsh. But, especially given the
intentional deception findings, the court of appeals declined to say that the
injunction was more than curative. Further, SPD argued that the district court abused
its discretion in the sweeping scope of the relief it ordered, especially in
view of such factors as the relatively brief time the public was exposed to the
deceptive materials and the time passed since their withdrawal. “Although
Defendant’s argument is not unreasonable, and less intrusive requirements might
well have sufficed, we cannot say the court’s orders constituted an abuse of
the court’s wide discretion to fashion the terms of injunctive relief.”

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